Australia chomping at the bit to unleash new tax weapons against BEPS

Kitty Miv, Editor18 May, 2015

Kitty's Kountry Rankings are below, with a description of how they are kompiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

As the old saying goes, "if it sounds too good to be true, then it probably is." India seemed to be on the cusp of doing something remarkable, introducing a major – perhaps the major – tax reform of the post-war era, when the lower house of Parliament approved an amendment to the national constitution vital to the passage of the proposed goods and services tax (GST) legislation. But then the upper house came along and spoiled the party, by delaying its vote on the bill and sending the amendment back into a seemingly endless loop of legislative scrutiny of Kafkaesque proportions. But should we really be surprised, given India's form in this area? These potentially ground-breaking reforms, which could transform the tax and investment environment for the benefit of India's ailing economy, have a habit of going round in circles without ever seeming to reach their destination. The GST is one such reform. Even though it is a tax, it will surely mark an improvement on the present situation, with inter-state commerce caught in a complex and inefficient web of indirect taxes levied at state and central level. But I had a sneaking suspicion that the International Monetary Fund was getting a bit over-excited when it recently factored the introduction of the GST into its economic growth forecast for India. First proposed a decade ago, the proposed GST has been caught in the crossfire of a battle between the states and the Centre over tax jurisdiction. Even though Finance Minister Arun Jaitley has prioritized this reform above many others, I think we'll be lucky now to see it in April 2016, as hoped.

Warning – some of you may find the following pun offensive (or at least just plain unfunny). But it seems rum of me, for someone with my reputation for indulging in a tipple after a hard day at the office, to criticize an attempt by lawmakers to provide tax relief for a drinks maker. Especially as I complain so frequently that without regular drinkers the treasuries of the world would be almost dry (I suppose that counts as another pun). But the proposal to cut the tax bills of Kentucky's bourbon producers, while laudable, in a way symbolizes all that has gone wrong with the US tax code (and other nations' tax codes, come to that). Tax expenditures, or, in other words, special interest tax breaks like the one being proposed here, are estimated to cost the US Treasury some USD2 trillion per year in revenue foregone, and they are one of the main reasons why some taxes in the US, notably corporate tax, are so high. The fact that this tax break is being proposed by two Republicans who support comprehensive, pro-growth tax reform, designed to sweep away special interest tax breaks and allow tax rates to be cut, more or less confirms my fear that such reform will be almost impossible to achieve in the US. So why have the pair responsible for introducing the legislation in Congress gone against the grain (ahem) in this way? Well it isn't that hard to figure that one out when you realize which state it is they represent. No prizes for guessing it starts with a "K." And no, it's not Kansas.

For a government so constrained by the fiscal straightjacket of a massive budget black hole inherited from the previous administration, the 2015/16 Australian Budget, announced by Treasurer Joe Hockey last week, was actually pretty generous, at least as far as small businesses are concerned. There was the promised tax cut for small companies, a so-called tax "discount" for unincorporated firms and a substantial increase in the tax deduction available to small businesses investing in new assets. All things you'd expect from a conservative Government. Ordinarily, this might be enough to earn Australia an encomium. But then Hockey goes and drops a bombshell. Anyone following international tax developments over the last few months may have noticed Australia chomping at the bit to unleash new tax weapons against BEPS. That horse has now well and truly left the stable with the unveiling by the Treasurer of the ominous-sounding Multinational Anti-Avoidance Law, which has been inspired by the UK's much-criticized (by tax experts) diverted profits tax. Few would deny that attitudes to tax planning are changing, and that tax mitigation at the more aggressive end of the spectrum is increasingly unacceptable, irrespective of whether it is right or wrong. The problem is, policy makers aren't taking the time needed to obtain a thorough understanding of the way in which the world of international taxation works, a fact demonstrated by the OECD's impossibly short timetable for the completion of its BEPS work, which this new law pre-empts in a massive way. In much the same way as the diverted profits tax, the Multinational Anti-Avoidance Law seems to me a knee-jerk reaction designed to curry favor with the public. As a number of commentators and business groups have observed, it could well backfire on the Government.

Casting an eye over the recent news, it's been difficult to find a country on which to bestow an encomium. But perhaps poor old Italy deserves a bit of break after some recent savagings in this column, following the news that low-paid Italians celebrated Tax Freedom Day - the notional day when taxpayers' income stops funding state expenditure and is received entirely by taxpayers for themselves - one day earlier this year, on May 13. It isn't much, but it's something for Italy's over-taxed citizens to cling on to, especially after Prime Minister Matteo Renzi announced last month that taxes would not be raised during the next three years (although something tells me that it's going to be difficult for the Government to keep this promise). It won't be much comfort for those earning more the EUR24,000 (USD27,000) per year though. They effectively have to work for the government for just over half the year. I suppose they can count themselves lucky they are not living in Belgium. There, the government doesn't release you from your obligations until August 6.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 147th) one or more countries are given encomiums and one or more are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at minus 2, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net

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